Room SD-106
Dirksen Senate Office Building
Washington, D.C.
Friday, January 19, 1996

CHAIRMAN BROWN: Let's resume, please. Our next witness is Ambassador James Lilly, who is at present a resident fellow and director of Asian studies at the American Enterprise Institute. He's had a long and distinguished career and a varied career in public service, having been Ambassador both to China and to the Republic of Korea, having served in Defense Department positions, including Assistant Secretary of Defense for International Security Affairs. He has served in the intelligence community, as well, having been National Intelligence Officer for China, among other activities, and has also been on the National Security Council staff. We welcome very much your appearance here today with us, Ambassador Lilly. Please proceed.


AMBASSADOR LILLY: Thank you, Mr. Chairman. I would just like to add one comment to my curriculum vitae. I spent 27 years as a clandestine intelligence in the Director of Operations for CIA, 3 years in analysis, and I also served as the Director of the American Institute in Taiwan; therefore, I was the only chief of mission that served on both sides of the Taiwan Straits.

I think today I am not going to talk about budget responsibilities or overall intelligence community coordination. I'll give you my views, but I don't think they'll be worth very much.

CHAIRMAN BROWN: Could you move your microphone a little closer?

AMBASSADOR LILLY: Yes. I they won't be worth very much, but I would like to talk about operations, intelligence operations, and the links between intelligence and policy at embassies and in East Asia where I served. I have to admit initially to a certain bias that I feel that we have to have a small, select, secure, and funded clandestine service with clear priorities which are changing.

I would add just one thing about the community, though, having served as a national intelligence officer and in State briefly, NSC, and Defense, that we have to have an independent analytical and predictive centralized intelligence function. I don't believe that either State or Defense can be entrusted with this. It does not have to be large. Excellence is the byword. The British, the Australians, have refined this function and made it respected and relevant. We have never quite succeeded.

Let me get to the business now of intelligence operations, which I will try to talk about. You are somewhat restricted by, still after all these years, sources and methods, and I may take refuge from time to time in closed session, if we can have such a thing. But I have to tell you that in my experience in the intelligence business and the operations directorate that hard targets, tough work, is often resisted. I had a station in the Far East that worked with me as an ambassador, which was a clear example of this.

The intelligence targets of the enemy, the left-wing groups, the very difficult job of penetrating a denied area, was simply too tough. They went into recruiting local politicians, government officials, but they established a good liaison relationship. And when we had a tragic assassination attempt they were effective through this by getting the person who conducted it and breaking them. But more in dealing with hard targets, I was more dependent upon Vince Brandt at Harvard University and his analysis of the left wing movement in that country than I was on CIA which avoided it.

Let me make another comment. I think there's been sort of a breezy statement that's been made quite frequently to the effect that we should not have cookie pushers in the embassy because you don't meet terrorists at diplomatic cocktail parties. That is bunk. It's dead wrong. These are comments of an analyst, not an operator. You do meet Iraqis, Iranians, North Koreans, who are still terrorist targets at embassy functions, and these embassies are the command and control centers for terrorist action. I know that from personal experience because the Iraqis targeted me for assassination, and we found it out through a link into their embassy.

You need an on-location command center which is secure for your operations. You need files, you need close support, you need the infrastructure of espionage. People talk about nonofficial cover as though it is some sort of a new mantra. I can tell you that nonofficial cover is dangerous, inefficient, and time-consuming, but nevertheless it's an integral part of our new intelligence service. But don't go too far. I can tell you, having been declared persona non grata almost three times, twice as an official and once as a nonofficial, that being unofficial and feeling the network closing in on you and having to get out in the nick of time is a very frightening experience when you face a long-term in jail if you're caught.

I think particularly it's very important for continuity in operations, you've got to have a long-term view. And this is only done by people dedicated and working in an organization clandestined over a long period of time. You have to build into the movers and shakers in the financial and political worlds if others don't do it, and very often, they don't.

let me cite an example. If, in fact, you don't have that sort of a network, and in many instances we lack that now, I was reading the book, for instance, on Allen Dulles called "Gentleman Spy," and in the old world of Wall Street and Europe and the link to Japan you had this network built up by people who talked to each other. It wasn't classical espionage, but it was getting below the surface and getting information that was critical to your government.

Today, this exists all over the world. It exists in Europe, it exists in Hong Kong. Let me tell you about Hong Kong. Hong Kong has people, billionaires, who go into Peking, are tied into the People's Liberation Army, see the leadership constantly, deal with them, and they are available to us. I don't think we have anybody in the clandestined service these days that can operate in this milieu. If you had it, you would have insights into leadership movements and the economic and political military sphere which I think you lack now.

We had this in the past. Businessmen have this access. Merrill Lynch, I am sure; Morgan Stanley; Shearson Lehman; but very often they do not work intimately with the United States Government and share their insights. In the old days we had it. Allen Dulles had it. We had a certain continuity. As a young officer of 30 years old in Manilla I inherited leading people in the Chinese community which plugged into the whole powerful apparatus of politics and economics in the Philippines. I met these people again 35 years later. They are still in there doing this job, except now it's all linked into China.

What I'm saying is this is an integral part of the intelligence collection function. It has to be done in some ways by DDO people, and it has to be worked through people with access to the power brokers of the world. They will not sit down and tell necessarily an embassy official what they're doing.

The way you run a clandestined operation requires an infrastructure. It requires surveillance teams. It requires phone taps. It requires what we call a close support system. It requires a knowledge of enemy security practices, especially when you work in a semihostile environment. This requires years of recruitment and training. It requires recruitment in the United States of people that go back to their country and work for you as a contract agent, contract employee, for maybe 20 or 30 years as a support agent.

The dangers, of course, of getting into soft operations, if in fact you get soft on your targets these people can be on your payroll, you filling their rice bowls for years and years, and accomplishing marginal efforts. It's a judgment call by an experienced intelligence officer working for supervisors that understand the nature of the business, understand fraud when they see it, and are able to break these people and separate them if they aren't producing. But the infrastructure very often is recruited in New York City, Chicago, San Francisco, Los Angeles, Houston, that go back into the countries and form the basis of you getting a handle on what is happening, and you can't conduct clandestine operations unless you have this.

These are basically long-term operations, and you have to be patient, but they pay off. When I was in Taiwan there was one operation that justified a 35-man station. It was recruited years ago, it was handed from officer to officer, it was handled very delicately, it was very important, it was a penetration of their nuclear establishment. And we knew through this -- you couldn't get it through comment and you couldn't get it through overhead photography, you had to get it through human penetration. And we knew they were conducting a clandestined nuclear program.

We could not confront them with it or your spy was dead. There were perhaps 10 or 15 people that knew about this. Eventually what we did was to clean out the safe, exfiltrate them from the country, and the confront them with the hard evidence, and the whole program was stopped. I think this is the sort of operation that is pure gold for the United States. It took years and years of work, years and years of patience, countersurveillance, watching the other side, how they ran their situation. It was very hard for me to get the chief of station to branch out into other delicate operations, because, he said, the security apparatus even in Taiwan was too formidable. I said don't worry about it, I'll take care of the flaps. You go out and get the agents.

Let me bring up another portion. I read the newspapers today about the cozy effort between CIA and the Defense Department in covering Bosnia. I hope it's true, and I hope it works. My own experience is that the Defense Department, the Defense Attache Office in Beijing in 1989 when you had the crisis at Tiananmen was absolutely superb. They could ruin teams all over Peking, with mobile communications, Chinese language officers who knew the streets, who could elicit from Army units, and give us a finger on the pulse of a fast-breaking situation, run road blocks, get people in and out, superb.

They did a good job in tactical collection of cultural intelligence in Somalia. They are best at it. They are very good at it, and they should do it. The Agency was way behind them. They didn't have a feel for this thing. They didn't have the people that could go out in the streets and do the fast comm and get to you so you could react to it, faster even than CNN. CIA worked, fascinated with process logically, because CIA has been burnt by fabrication for years and years, burnt by double agents.

You've heard about Cuba, Iran, East Germany, Russia, they are fascinated by process. And very often, the only kind of information they'll accept is when you have case officer contact directly with the penetration agent, even in a hostile area, very difficult to do. But the process fascinates them. The information may not be critical, but it is authentic. Defense, basically in this situation and in most situations I've faced, is the vacuum cleaner. It was true in Laos when I was there between 1965 and '68. Collect it, send it home, and let the analysts worry about it. CIA doesn't do that.

Defense gets into warp speed on numbers. Collect great numbers of data. CIA, I hope, has broken away from that. But the important thing, I think, to understand is how much it takes when you're running a clandestined operation in terms of authentication and reliability to get at the source. You have to work for years to set this up. It doesn't just appear out of the ground, and you have to know what you're doing and go after it. In our time it was the Vietnamese Embassy, the Chinese Embassy, the Soviet Embassy. Now, it's terrorist groups, it's perhaps the criminal mafia, perhaps it's the drug lords, very difficult operations, years and years of infrastructure setting up to get the penetration inside that you need.

The relationship between the Station Chief and the CIA and the Ambassador is a complicated one. I think Frank Carlucci put his finger on it when he said it's a question of personalities, in many instances. I had good Station Chiefs, I had mediocre ones, and I had nonentities. It's true, they try to appease you as Ambassador, but they also try to get around you by doubling up on contacts in the host country and by slopping over into soft intelligence. But they will bend. You have the ultimate authority, and if you want to use it you can get them to come around.

I'm not terribly concerned about that, because the Ambassador has in his hands the basic letter from the President which gives him the power to get into the station's operations, leaving aside specific sources and methods. This wasn't necessarily applicable to my case, because I was in the business for a long time. But I will get back to this point again about the necessity to work on infrastructure.

I was both Station Chief and Ambassador in Peking, about 15 years apart. I worked in Peking originally for a man called David Bruce, who was in OSS in England in World War II, understood the intelligence business, and we had an immediate good chemistry. The Foreign Service was something else. But at least we were able to understand each other, and when I carried out my passive exercises to set up an infrastructure in China, not doing anything at all that could be construed as hostile to the Chinese -- those were my instructions. I was declared, and I was told to stay away from lousy little militia-men or get out there and try to do the usual thing.

But what you did is to spend painstaking hours going out and finding certain locations that in the future you could use for clandestined operations. We didn't have any agents at the time. I'll tell you, when I came back 15 years later in the inventory were certain contributions that I had made 15 years ago. It took that long.

The labor-intensive process of handling an agent in a hostile environment, if you talked to my good friend Jack Downing, who has worked both in Moscow and Peking, when he handles some of his difficult operations in Moscow it would take him 3 days of full-time work. If you read Moldin's account of how the KGB handled the Cambridge five in Great Britain, the hours and hours they would spend on subway rides breaking surveillance until they finally made the contact. There's always the ludicrous since of this thing because Guy Burgess, one of their agents, was a shameless drunken homosexual who would show up an hour late for meetings, drunk, and make outrageous statements, and they found it very hard to handle this guy, it never worked out quite the way you wanted, but he was that kind of a person.

But what the Russians had done in this process was to set up an infrastructure in the 30's in left-wing Great Britain to spark the groups in Cambridge, the cells of the fashionable radical chic left-wing students that drifted in: Guy Burgess', Mclain, we had Karen Cross come in, we had Blount, we had then the worst of them all was Philby, every one of them recruited, every one of them went into the British service, every one served the Soviet Union very well, but it was a process that took place from the early 30's until the 50's and 60's.

This was the kind of operation that, in terms of the Soviet model, produced pure gold, and it took an awful lot of work spotting apparatus, people in the international communist movement watching how the Cambridge element moved, and picking and getting the right man, pulling him out, having him denounce communism, and then enter the government, and protect him. Philby protected Burgess and Mclain. This shameless drunk, Philby got him out of there before the guillotine dropped on him. I suppose it's one thing at least Aldrich Ames didn't get out. Maybe they don't have a mole higher than him that protected him. I hope that's true.

People then say some of your best operations are walk-ins, they are volunteers. Penkovsky, the greatest Russian penetration we ever had. The clandestined trade craft played into this. You couldn't have had Penkovsky stay in place although mistakes were made for all those years and give us that critical information during the Cuban missile crisis without him being handled right by an officer that understood the environment in Moscow.

We understand, and we have learned, and if you have read Evan Thomas' "The Very Best Men," you know the sort of dilettantism that infected us by the elitist Americans who took over the intelligence clandestined service in the 50's and 60's. The air drops were disasters. Things they had worked in World War II with honorable resistance movements didn't work in Szechwan, China, where all their efforts were rolled up, Albania, et cetera. Networks that they established led to fabrications and lies and deceptions.

But this institutional memory is critical, because when I was in the Agency in the late 60's in Hong Kong and places like this I had some of my military colleagues come up and tie into the same sort of fabricated Chinese intelligence networks that we had resisted and thrown out 15 years ago, and I couldn't convince them to get out of the business, because, and I'll just digress a little bit, the standard technique that the Chinese fabricators used was to get provincial newspapers in China which are not readily available but could be smuggled out, write up the reports based on these in Hong Kong, and then give them to the case officer and say if you don't believe us, check the local press. And they considered this confirmation. We said no, it's where you're getting the stuff.

But anyway, this sort of fundamental argument went on, and I think in this sense if somebody unleashes human collection in the military to get into strategic intelligence, penetrations, and all this sort of thing, watch your step. Be careful. It could get -- they are very energetic, they are very effective in some ways, but I think there's limits as to how much you want to get them involved in this kind of work, because it's very selective, very careful work, very carefully targeted.

Let me make one or two more points. I think, again, your Agency people have to be in the right place at the right time with the right circumstances and the right network to make a contribution. People have talked incessantly about the failures. I'm going to break an old intelligence habit and talk to you about some of the partial successes. Now, these happened a long time ago, and they aren't smashing successes. They are where you -- I was sent to Cambodia in 1961, and our target was quite clear. It was the Viet Cong and it was China and Russia.

We weren't terribly confused about getting drawn into other things. We focused on these targets. And the idea was to either get this through the Chinese embassy or put people in China that could tell us what was happening after this great leap forward where they had Mao's lunatic social engineering policies, the rations were dropping, there was great movement in the countryside, turmoil in China. Could you get your finger on the pulse of this movement?

Here in this little two-bit backwater Southeast Asian country which was very friendly to China with a very small station, just a few people, we were able to get into this thing, and by a variety of means, buying people's letters from home, debriefing people who had just come back, sending in travelers into the area, were able to pull together an understanding of a disastrous development that was taking place in China. And we said things were going to be falling apart. The rations had dropped to seven caddies a month. They were having to reorganize their agriculture out of the gridlock of the commune system.

In May of 1962, thousands of Chinese poured into Hong Kong, desperate, broke down the barriers and came in, and we said you see? All I'm saying is that in this case you were able to tell your government that something was going on in China I think that went beyond what they were getting in the press, what they were getting in FBIS, and what they were getting from their own collection.

Our targeting was clear. We got into the Chinese Embassy because we got a defector, and we got them out of there. We didn't get them out of there by walking them through, by walking him right out of the normal ways. We had to put him in the back of a trunk of a car, take him down Route 7 to Saigon in a very dicey operation. But we got him out, and he told us what was going on inside.

In Peking -- I can't go into this very much, but all I say is we started a collection technique when I was there which was going on when I came back as ambassador, which was again producing real understanding. But it was the evolvement of 15 years of collection of a lot of data.

In 1979, at the time that we normalized with China, before that we had anticipated something out of the recognition that China was moving decidedly more against the Soviet Union and was looking for real help after they had suffered the disastrous defeats in the border war of 1969. The opening with the United States came. This led, because you were on the spot, because you had the links, because you had the background to a security cooperation which paid off, which paid off very well, and which led -- I can't say the end results, but led to the cooperation that we had in Afghanistan in the clandestined covert paramilitary area which led to the defeat of the Russians and perhaps one contribution to the collapse of the Soviet Union. But because we had built up this relationship of reliability and trust over time clandestined, it pays off. It pays off in a number of areas.

It pays off if you have the liaison relationships of trust and reliability, though somewhat insulated from the political vicissitudes of the moment that when we had a situation in Korea where the North Koreans had blown up a South Korean plane, KA-858 in November of 1987, we got the assassin, we got her there, and after about 3 weeks we broke her.

Actually, she collapsed. She came up with the full story, and Washington wanted authentication, and because we had a good relationship with the Korean service we got one of our people who looks slightly Korean into the jail cell to watch this woman's eyes and her body movement and her language to get some sort of an authentication, because people are always suspicious of another intelligence service's using intelligence to influence you. The Chinese have done this for years. We thought the Koreans might do this. Our man went into to authenticate.

But the important thing is that when she came out with her story she was trained in China by the North Koreans in a safe house unbeknownst to the Chinese, and trained in the Chinese language to say if she was caught in her operation that she was from China. We made sure, through links, Korean to Chinese, et cetera, that they got that information. I don't think the relationship with North Korea was ever quite the same.

Dealing with the Chinese certainly is not constructive engagement only. Deterrence is the reverse side of the coin. The high priority target is, of course, the Chinese military. And I was talking with Cochairman Rudman, who came over to Peking right after Tiananmen and met his old Chinese adversaries in the Korean War. This didn't happen. But let me tell you that when you're looking for some sort of access, the Ambassador can be a point man for this thing. He's not the foil of a Chief of Station, but he attracts a great deal of interest, and his staff does.

If you're in touch with the Chinese military, which we were not at the time, and if an American with considerable reputation and who is -- you know, the Chinese have an old expression, if you don't fight, you can never be good friends. You sight somewhere in that group a man who has a particular fascination for the American military capabilities, and there's all kinds of Chinese in the military who have that. They watched Desert Storm on TV, and they know what we can do, and they have an enormous admiration. But you get in the course of direct contact through people who have a legitimate means of seeing them, the guy in the corner that you know doesn't like what's happening and is sympathetic to you. If the Ambassador knows about that, he can pass that on to the Chief of Station, who then focuses on that guy as a target.

You know that the Chinese have a statement that they've had since Sun-Tsu, 2500 years ago: When capable, feign incapacity. Their budgets, their Soviet acquisitions, their transfer of technology, their power projection, all of these things are kept from you. The only way you are going to get them is through clandestined collection and technical means. But again and again it's been human work that's made the essential difference.

You look at the Aldrich Ames case and you see the incredible damage he did to the American intelligence community. But as my old friend Bill Colby said, the thing that amazed him was that Aldrich Ames actually blew 10 officers that had the Soviets thoroughly penetrated. It's a sad day when you have to derive benefit from that, but it seems to me years and years of work on Soviet targets, surveillance, contact, cultivation, assessment, recruitment, training, use in place, paid off. This paid off in China. When we actually got our leading penetration of the Chinese military state security, he led to the identification of Larry Wu Tai Chin. We got the one Chinese penetration of the United States Government that we've identified.

One more thing: Getting into terrorism, drugs, criminal mafia. Again, if we're going to get involved in that in the Agency, and I would say probably we have to in a much greater way, remember, it takes infrastructure and very hard work. Your safe houses, your liaison relationships, your surveillance teams, your taps, your close support, immediate on-the-scene awareness, control in the 20th century. This kind of thing has led, if I can go anecdotally one more time, in Thailand we had a phone tap on the Russians. We monitored, day after day, data. And finally one day that phone call came in with an American accent. Sloppy trade craft. He had identified his meeting place. We surveilled it. We nailed an American who was taking files out of the top secret files and giving it to the Russians, through a phone tap, laborious work day after day after day watching this, until some alert transcriber picks up the conversation and we get the spy.

Trade craft is violated. I've been in countries where it was violated, taking a liaison from one operation, putting it in a unilateral operation of another case, the safe house is compromised, people get arrested, people get very badly hurt. Bad trade craft. The CIA has been responsible for that. I presume we're working out of it.

And finally, I think we've spent a lot of time, and Bill Barr will talk about it this afternoon, my friends in the Agency are quite concerned about it, is the whole business of the CIA's role in drug penetration, terrorist penetration, when you run up to the moral and legal problem of using agents that have committed dastardly crimes to make penetrations of the enemy target. I'm talking about if you're running a terrorist operation in the Middle East, in order to get into inner circle your agent has to kill an Israeli. What do you do about that? You back away.

But your job is to penetrate the inside of the terrorist organization, and I think you've got to look at the lines of the moral dilemma and the legal dilemma you have in working against these organizations. It's a hard call. My answer is, at least a temporary answer is, that as CIA should focus in purely on the foreign intelligence collection function, if in fact we get a penetration of a drug and terrorist operation we turn that information over to DEA or the FBI for action. They don't use our information, but if we can spot the leader, where he lives, who his subordinates are, et cetera, then it's their business to collect independent evidence to convict him.

I think you've got to protect sources and methods unless you are able to exfiltrate your agent as we did in Taiwan. Again, it's a case-by-case business, but I think you've come up against a dilemma in terms of what you have to do to penetrate an organization, and the kinds of decisions you have to make in doing it. These are not easy decisions.

I think I'll leave it at that, and if anybody's got any comments or questions, I'd be glad to try to answer them.

CHAIRMAN BROWN: Thank you very much, Ambassador Lilly. We greatly appreciate the depth with which you've described the subject of clandestine collection. And as I'm sure you noticed, everyone in the room has been fascinated, indeed riveted, by your presentation, even including those who have been involved in some such things themselves. And it's equally true, I think, that it's been fascinating to the journalists present. It's like reading a John Le Carre novel, except that this is for real. So we've really appreciated this.

I want to go back to something that you talked about at the beginning of your presentation, and that is the value to collection operations of using nongovernment people. You mentioned business people. But of course there are others who are able to get information and who associate with what the intelligence community thinks of as targets: journalists, academics, religious figures. And on the analysis side, where again you pointed out that you have received more useful analysis sometimes from academics than from people inside government.

The question I want to ask is how can that relationship, which can be a very delicate and sometimes an almost adversarial one, between the intelligence community on the one hand and some of these private sector people, actually best be utilized? Journalists and academics, for example, are often very leery about associating with the intelligence community, and some restrictions have actually been enacted into law. Academics who do analysis that can be very valuable and parallel to what is done in the intelligence analytic community, sometimes want to be cooperative, sometimes not, because of taint that is sometimes associated with being connected even by speaking with intelligence community. I don't know that you have a solution, but maybe you have some suggestions.

AMBASSADOR LILLY: I think, Mr. Chairman, you've put your finger on a very tough problem, because the trust and the sort of old boy network developed between, let's say, Allen Dulles and his German contacts, he worked on Wall Street, he'd been in Geneva during the war and he'd -- I'm sorry, Switzerland -- and he'd known about these things, and had developed a network where you could sit down and talk to these people.

I think director Casey had some of this through his contacts in New York, but a lot of it's become lost, and a lot of it has become contaminated. And businessmen sometimes cooperate and sometimes don't. Some are quite cooperative. But really, I think there's a lack of trust that if they tell an intelligence officer about what happens it's going to somehow get out and hurt them.

I remember that, for instance -- well, I won't get into that, I guess.

Journalists, I think, you don't recruit them. We can't do that. They've told us not to do that. But you certainly sit down with your journalists, and I've done this and the Station Chief has done it, others have done it, it's a wonderful way of finding out what's happening in a country, whether it's Steve Muffson or Patrick Tyler of the Times or Debbie Wong of ABC, you've got to keep in touch with these people because they're very well plugged in. But you stay away from the clandestined aspects of it.

Academics: It's better. I mean, you've had Joe and I come down to NIC. Now you've got Richard Cooper there. We've drawn in academics. There's some of them that are still very leery about it. I remember when I was at the Harvard Kennedy School in the fall of '91. My door opened a crack one day. I saw a furtive head come around the corner, slipped into my office, slammed the door, and said: Don't ever tell anybody, but how do you get in touch with CIA? If it gets out I'm dead in the Kennedy School.

I put him in touch. Actually, there are CIA people at the Kennedy School. But a kid that was trying to join the Agency would probably be ostracized by his own peers. That has caused problems. They can't recruit on William's campus, Michigan ran them off, that sort of thing. It's difficult, but there are enough academics that if the Agency, I think, works at it assiduously, and if they have people that can talk academics language and carry to the academic a knowledge they don't have, then you get into an exchange, and that is more acceptable.

We get the benefit of academic writings. We read the magazines where they contribute. I think the Agency does get certain people under contract to take on specific projects. I know that for instance the Defense Department works closely with Rand, which does some very good work on a wide range of subjects that contribute to some enlightenment. I think we've got to work at this.

But the thing that struck me in the clandestined field is the breakdown of your relationship between the Station Chief and your operator in the field or even your people in Washington and the great power networks of the world. And I specifically point out places like Taiwan, Tokyo, Singapore, where you have these very international groups that have enormous power, great linkages, ties into your opposition, even your antagonist enemy, who know a great deal about what's going on, with whom you have natural contact. This is where I think more work needs to be done and I think you need the Ambassador and others to help you on this, because they have much better access than the poor old Station Chief.

CHAIRMAN BROWN: Thank you very much.

Senator Rudman?

VICE CHAIRMAN RUDMAN: Who else would like to inquire? Mr. Harrington?

MR. HARRINGTON: Ambassador Lilley, we've heard from time to time complaints about the working relationship between Chief of Station, the Ambassador, and the CIA. And you've said it's largely a matter of personality. But do you feel there are any institutional shortcomings in State, the preparation or mission of the Ambassador, or the way the CIA approaches it, that would improve or reduce the shortcomings?

AMBASSADOR LILLY: My own sense is the situation probably has improved on the margins in an evolutionary way over time. Certainly, back in the 50's and 60's and 70's during the Vietnam era there was a lot of hostility in State. I would say almost you might term it an institutional bias against the Agency. They were somewhat a lower order of creature who worked the streets at night, who didn't have really legitimate functions, and caused flaps to embarrass U.S. Government policy.

I know this very well because I was involved in one which seriously embarrassed the United States Government. I, myself, didn't have the operation, thank God, but I was part of the station that was affected by it. And the Ambassador closed down all the operations in the station. You can't go out because you have so severely embarrassed the United States Government by your half-baked operations.

I haven't said this in any forum, but we went out anyway. I had agents to deal with. And I remember going straight out of the Ambassador's cocktail party to a clandestined meeting that night at 9:00. It eventually paid off, because these guys brought in information that was important to us and contributed the American knowledge of a very critical situation. But I've seen this change.

Certainly as an Ambassador, in my own case, I would not tolerate any snubbing or snobbish treatment of the Agency people. They were treated as part of the team. Sometimes their leaders made it a little bit difficult because they were not exactly cooperative. But you have the tools that you need as an Ambassador to get these guys to cooperate, and I think that my own sense is that that is not a serious problem. You can have meetings every single day, if you want.

We did have these in Laos when I was there. The Ambassador had a daily country team meeting at 9:00 every morning, and the whole country team came. And the intelligence sheet was there and was subject to the Ambassador's queries, followed up with an individual meeting every single day with the Ambassador where you carried the intelligence into him and had to explain it to him. This was Bill Sullivan, who was a very meticulous watcher of what we did. Every time we had a great success it was my guerrillas. Every time we screwed up it was CIA mercenaries. But that was part of the game. We had to accept that.

But I think that problem is manageable. You do have bitter personality conflicts. When the Ambassador finds that the CIA Station Chief is living on a hill in a house that's three times larger than his, it causes a certain amount of problem in his view of his position. I don't think that's terribly serious.


MR. GOSS: Thank you very much, Mr. Chairman.

Mr. Ambassador, I certainly enjoyed what you had to say.

AMBASSADOR LILLY: Well, you know the business.

MR. GOSS: You know a lot more about it than I ever did. I'll be happy to admit it.

There are two points I wanted to ask. The first was that I think we've all been struck with the "need side" of collection and the toughness of targets, and the fact that sometimes we don't get to the tough targets. And you suggest that it is because there are other options. I wonder how you manage to focus our efforts, and what suggestions you might have so that we really do focus on the tough targets. How do you ensure that the energies are kept concentrated to do that? I'm not sure that there is any target that's really tough if you're given enough time and enough intelligence to finally get to it, or enough innate intelligence to get to it.

The second question, because I think part of your answer may refer to the network you earlier described, the "seamless web" that you refer to of a network. That network that has been spoken of pejoratively, I think it would be fair to say, as part of the "good old boy" problem out at CIA, and the reason we got into the Ames case and so forth. And I think there is room for confusion on the subject of what we're talking about when we're talking about a vast array of contacts who are helpful versus an elitist group, which I think you referred to in your comments. And I wondered if you'd care to comment about culture in that sense today as it affects getting to the tough targets?

AMBASSADOR LILLY: Tough targets really comes out of, I think, tough management. If you have fuzzy requirements that allow a Station Chief to slop over into the easy stuff, it's part of your own management structure that is weakened. For instance, if you have a Station Chief, getting back to a case we all know about, the Ames case, if you have a report to check out her family in Columbia to find out if her father was independent wealthy and whether she inherited a lot of wealth, and the Director goes to the station. The Station Chief comes back and says I've got too many other things to do. I can't do this I suppose a good Division Chief and a good DO would say you get on an airplane and get back here.

Now, you've got two choices: Either you go out and find this out because this is important to us or you pack your bags and get out. I think that element has been lacking. As a result, nobody checked out the family, and thus guy probably boiled on for a couple of years with his obscene behavior with a myth of somehow having independent wealth, which never existed, and it was a fiasco. But that operational decision was not made. People weren't really sensitive to the importance of pinning this thing down.

I think again and again it's getting the agency back into tight management of operations. And this is always a judgment call between the free-wheeling eccentric case officer who's able to recruit, and sometimes this guy is not a Harvard Ph.D., he's a street fighter. He probably drinks too much, he probably has a girlfriend, but he recruits Russians, in the old days, or he's able to get into a strata of society that you have to use, often resisting discipline. This is a management problem, and I think probably they erred too much on the side of indulging people who use these sloppy techniques not to get good operations but just to screw around on the fringes and keep himself occupied.

I think it boils down to the sort of tough management you have to have in intelligence, the reestablishment of tight discipline, of counter intelligence; review of each operation for prospects of deception; getting the case officer away from trying to sell his agent, pedal him; resenting any hint that he could be deceiving him, bristling at this; and it goes up the line which you call organizational arrogance. Discipline has to be established, the Division Chiefs have to be given responsibility for watching these operations carefully, they have to be held accountable, they can't be looking over their shoulder constantly about legal problems or human rights problems. Again, these are important factors, but you have to keep a lot of focus on the discipline of intelligence, which trade craft requires.

On the old boy network, and I think I wasn't talking about the sort of cutesy business you had with Philby, with the Britts in MI6, and the way they protected this awful, disreputable spy for years because he was part of the Cambridge mafia, even when it became apparent, they protected him, we had a certain element of that in our Agency.

But I'm talking about something quite different. I'm talking about the ability of the Agency clandestined service to connect into the network of power brokers that changed the world. And a lot of businessmen have this. They have a sense of this. I know businessmen who have a very good -- they would fly into China Armand Hammer, and he would see four Chinese leaders in two days. I would get included on one or two of these meetings. But he obviously was having intimate conversations because he had the biggest investment in China, $800 million in a coal mine. We never got any good intelligence feedback on this. Of course, the whole operation collapsed as a fiasco.

There are many others that do this. But I think what we have lost, and again, I have not read a clandestined report for 4 years, so I'm really not plugged in, my sense is, and I talk to Agency people, that this link to the reality of power has dissipated. And what you do is if you get a penetration of a Chinese communist firm that's trading with China, you get certain data on, let's say, contraband sales and things like this, but you don't deal with the guy that's at the top that goes in and sees the top leadership in China. You don't deal with him. And somehow it seems to me this has to be worked around. And I think that is what's suffered.

I speak of the old network in terms of that sort of thing, where you had a comfortable relationship between people who were involved in the honorable business of intelligence and businessmen that were working to make a dollar but served their country. I think that's kind of broken down. I would hope that that can be reestablished in a stronger, mutually confidential way.

MR. GOSS: I would take your answer on the question of the tough targets to be quality of people more than any kind of new management structure. Am I misreading you on that?

AMBASSADOR LILLY: Well, I'm not really an intelligence management expert in that sense. I think you've got to keep a clandestined service. The continuity of experience is critical in being able to manage this. You've got to deal with the Ames flap and the compromise of your techniques and the fact that the Soviets fed this information all over the world, to Cuba and other people, who our people were.

My own sense, however, is the techniques that you use are really fairly well known, and you don't have to rebuild your whole intelligence service on the basis of the Ames compromises. Yes, other people have to be involved in human collection, but I think it should be fairly well differentiated who does what.

I am not a believer that you have to have a synergy between the analytical side and the covert collection side. That's sort of a nice comfortable comment to make, the wedding of analysis with covert collection. What I find very often that corrupts your covert collector into thinking he's some sort of an intellectual, you know, as old Dez Fitzgerald said once, he said, what I want in a case officer is a guy with a Ph.D. that could win a street fight. That's a beautiful picture; that isn't the way the world works.

I think very often analysts can help a covert operator do his job better, but I think you'd better be very careful about getting analysts drawn into the covert side because you want to intellectualize it or you want to give it more base. The covert side uses this data to recruit agents. It is not an end in itself. This is a differentiation, I think, that's very important, because the covert side is so tough to do he's got to be a very well focused guy. That intellectual accomplishment is definitely a tool in his quiver to get agents. But he's got to focus on this. And I think that people that come over don't really understand this. They think that the covert business is something of handling a walk-in, which anybody can do. It's much more complicated than that.

So I would tend to feel that you've got to improve on what you have and you have to be very careful you don't unleash the dogs of wars from certain areas, I think, that would get into the collection business with a gusto we would regret later.

MR. GOSS: Thank you, Mr. Chairman.

CHAIRMAN BROWN: Thank you. I have a list of several people who want to ask questions. I'm going to try to cut us off at 12:15 or a little after so that we can keep more or less on schedule. Those who I don't get to will have priority with the next witness. We'll see how we go.

Mr. Fowler is next.

SENATOR FOWLER: Mr. Ambassador, with the Chairman's request for brevity, may I ask you -- this is really a foreign policy question -- but then with the intelligence dimension that you raised. If you were Ambassador to China now and you visited Hong Kong, I imagine you would have a long line of American businessmen, Fortune 500 types that you described, who wanted to know from the American Ambassador whether or not after this transition they were going to be able to do business there, or do business the way they wanted to do it. What they are really looking for is a heads-up from intelligence sources as to whether or not it was time to move to Singapore or Djakarta or someplace. How do you handle that? What is the appropriate role of intelligence in advising American private interests in a situation such as that?

AMBASSADOR LILLY: Certainly, if you were Ambassador, you came to Hong Kong, and they wanted to get your reading on the future of China, I find very often they're telling you. But they will listen. I've done this a couple of times in Hong Kong. They've been respectful and they've come and listened.

I think what you would say to them is listen, we have somebody here that I think has an appreciation for some of the questions that you've raised in greater depth than I have. And I suggest if you would like to meet him I can arrange it, and bring in the Chief of Station, with his agreement. He knows who he's dealing with. Chief of Station can fire off a cable and find out what the status of the semiconductor industry in China, in Central China, is, and come up to the businessman and give him a report on the specific thing that he's interested in on the basis of all source collection.

This, then, gets the businessman hopefully contributing to what the Chief of Station doesn't know, how a particular factory works, the corruption of individual people, that sort of thing. And then you get the building of a relationship.

I think the Ambassador has the role, and should have a role, in facilitating this sort of thing. I don't think you're in the business of recruiting businessmen to work against their own corporate interests, but they've got an interest in getting something from you and you can get them something they can't get from any other source. You can really throw some light on their problems if you tap into your resources. And he can help you out. It becomes a mutual operation of we give, you give, and then it develops into friendship and hopefully the kind of cooperation you need to get the things that I was trying to answer to Congressman Goss about, the kind of network into important people that you need.

If the businessman comes and said he was in Singapore recently, he saw so and so who had some very interesting comments about Shandung coal mining, that would be very helpful to an Agency guy. I'd like to see that sort of thing warmed up.

SENATOR FOWLER: Thank you, sir.

CHAIRMAN BROWN: General Pursley was next.

GENERAL PURSLEY: Mr. Ambassador, you have outlined a number of characteristics for a good clandestined operation and a number of characteristics of those who would be participating in that process. I wonder if you would outline for us perhaps what a career progression for a person who is exceptionally good in this area might look like. And how one obviates that person perhaps being taken out of that kind of progression and being put into, say, management positions where they might be out of their element. And how, in the meantime, even for the good career progressions, you go about managing so that they are motivated; the right ones are kept; the wrong ones are penalized or somehow taken out of the process. How does one go about that, even though I know you've discounted perhaps a bit your observations in the management field? Nonetheless, it seems to me that this is central, to a major degree, whether the operations not only in the clandestined field but in other fields, too, are handled well.

AMBASSADOR LILLY: This is at the heart of some of your problems in the intelligence community. A young officer comes in, he works on a desk, he goes out and becomes a case officer in the field, serves a 3-year tour, comes back, gets to be deputy desk chief, goes out for another tour, comes back, desk chief, branch chief, et cetera, and he comes up GS-12, 13, 15, 16. That's the normal bureaucratic progression, and that's the sort of thing that you've got to be able to explain to a career man. A lot of them think in these terms.

The real world of espionage runs in a somewhat different track. What the Agency tried to do, which I thought was fairly sensible, was to really develop the area expert or the long-term recruiting operational expert. And I know one in Russia and one in China who were singled out and had the languages and were promoted to supergrade and they did nothing but recruit and handle high-level agents. They didn't get involved in the management of intelligence. And I think you've always got to leave a wide sector in the intelligence community for area expertise and pure operators that are outside the bureaucratic train. If you don't you're going to end up with a lot of bureaucrats who manage intelligence operations, and that isn't the answer. Yes, it's part of the answer to manage complicated surveillance teams close support, phone taps, all this kind of thing. That takes a manager to think these things through. He should be in the embassy in a secure area doing this. But out there on the street he needs a guy that speaks the languages and works the system. And they've got to have a communication. He's got to support the guy who can go out and make the recruitments.

I know in the military side, I've had good friends in the military who've made a career out of intelligence. Some of them have ended up never making general officer. Some of them like Jack Lyde, Bill Odom, Bobby Inman, have risen to the top as career intelligence people. I think the military has made more -- Vern Walters is another one -- that they have made more room for the intelligence expert, and I think that is very helpful because these people spend a long time in intelligence and they get a feel for agent operations, real agent operations, not vacuum cleaning operations and phony networks, the real stuff. And I think that they have tours in the Agency, they see how it works, they understand it, they talk to clandestined operators, it works fairly well.

All I can say is you've got to have both. You've got to have a management system, you've got to have a career system for GS people, you've got to have a system that they understand and work and progress in. At the same time you've got to have an outside system for eccentric area experts, recruiters, and operators, that rewards them with high rank, great respect, whatever it takes, medals, recognition internally for what they do and encourage this separate track.

GENERAL PURSLEY: This would lead, obviously, to a lot of other questions, but thank you very much.

CHAIRMAN BROWN: Last question: Mr. Dewhurst.

MR. DEWHURST: Thank you, Mr. Ambassador. I know time is short, and we may not be able to get into this in as much depth as I would like to get into it. I, too, have been concerned, as Congressman Goss had asked a similar question, as far as our success, our relative success. Not to say that we have not been as a community successful, but I wonder whether we've been as successful as we should given the resources which we've allocated in our human collection towards the hard targets.

I think, if I understood, by inference you felt that we were doing better at some point in the past than we are today. I'm wondering if that's quality of personnel, changing culture, or confused priorities. I was sitting with one of the area divisions chiefs in the CIA and discussing a highly important target. I was flabbergasted to understand that they've just recently made that a priority, whereas most Americans who read the newspaper would have been very, very interested in that target.

In the interest of brevity, your views on that, and perhaps just a word or two on your view as to the size of the clandestined service. Do you have a feeling as to whether or not it can be smaller and yet be effective, should it maintain the same size, or should it be larger?

AMBASSADOR LILLY: Well, the business of the intelligence culture always comes up, and it's been sort of bad-mouthed, and it's become kind of a code word for sloppy handling and self protection. And I think it's taken some justifiable hits, and I would say in Evan Thomas' book in the Ames case you had this sort thing magnified, as you did in the British cases and MI6.

Certainly, former Director Schlesinger found this to be a pain in the neck, and he tried to clean it out. He found that a lot of these people had become soft and ineffective, and I think he did quite an effective job in doing this.

I didn't mean to give you the impression that we've done better in the past. I think in the old days you had a lot more flexibility. When I went to Laos in '65 we didn't even have a budget. We were spending 75 million bucks a year, and finally the OMB came out, they sent Ted Shackley out, and we finally had to get budgets. But this was considered a sort of an imposition because we were fighting a war. We had a bunch of guys up-country, like Tony Poe, who were, we thought, doing a hell of a good job, and they didn't need a lot of bureaucracy. Anyway, it all changed.

But I would say in the paramilitary work, stingers aside, and that's controversial, that you learned a great deal and you applied in Afghanistan what you had learned in Laos and Vietnam and various other places, and it actually, in terms of achieving your objectives, the result, the fallout wasn't so good politically, and it isn't today, but at the time it was to administer a defeat to Russians, and we did it. We shot their helicopters out of the air with stingers. We worked with the Afghans to have a very effective resistance movement, and it worked.

I don't think you want to really get rid of that covert action capability. I think you've somehow got to keep a handle on that, and certainly the Special Forces in the military have a lot of people dedicated to it. But you do need a sophistication in dealing in a country which requires the political sense that sometimes, more often than not, CIA brings to the operation.

We do miss important targets, and I know what you're probably talking about, that somehow when you have a committee develop requirements it ends up into being sort of a patchwork of compromises and satisfying anybody's needs. It isn't a very precise operation. It's very often a sloppy, overworked operation.

And I never paid much attention to requirements. I had to find out what the boss waned, what was in the real world, and through private conversations and reading the letters and various things. But getting a sense of what you had to accomplish and getting to work on it and driving your people to do that, that was the important thing. And I say, for instance, in Cambodia in 1962 we had that sort of charisma where the payoff came, where you had people that had been working in operations for 10 years and made the mistakes finally come to grips. The down-side of that was, of course, that people we'd worked with are in jail or dead. There was a down-side to it.

But I think we have it again, but I think people are a little bit more frightened to get out and do things. They are very concerned. They are inhibited by restrictions.

I don't think that's a very good answer, but getting back to your question about the size of the DO, I know this has gone back and forth, I don't even know how big they are today. I imagine it's somewhere -- I hear the rumors are somewhere between 4000 and 5000. I don't know if that's true. Maybe it's true.

I suppose in my experience that a small station usually works better. And you have to be very careful about the proportion that you put into the embassy and the proportion that you put outside. The outside is not a panacea, as I tried to say. It's a real problem, and you've got to have the center of control, and you've got to have people inside that do all these things I say in terms of support of operations.

You've got to redefine your targets. I think that Director Deutch has started to really do this. I've read one report where he's beginning to drive the process, establish new priorities, which develop into hostile countries that you've got to work on over time, we know who they are, and the functional responsibilities such as terrorism, drugs, and, of course, the argument about the international criminal mafias. But again, the main criteria is a threat to the interests of the United States. And it seems to me that that's the driving factor in these kind of things.

If you put this all together, you get together with the Station Chief, you decide what you need, and it's probably not as much as he wants. When you try to cut, I know as an Ambassador, trying to cut intelligence functions, boy, you run into a buzz saw, both in Defense and CIA. They fight it. They fight it. They tend to be very bureaucratic and hanging on to the turf because they sense that once it starts to erode it's all going to go out. So you get into sort of these feckless long-term bureaucratic struggles.

One of my most capable Foreign Service Ambassadors, who was a very determined guy, tried to do this in Southeast Asia. He knew Defense, he knew CIA, he knew State. With all of his smarts, he couldn't change it a pinch, and I know that for instance in Taiwan they had an arrangement going there which was really quite useless, and we didn't really get rid of it until we broke relations. You run into real problems.

I can't really say the size, but I would say that you've got to do more with less. There's no question. And I think that Director Deutch understands this and I think he's working in that direction. But don't overdo it. Be very careful that you understand that in running a clandestined operation you really need these other things, if you're going to be effective. You've got to have judgment that cuts out the fat quickly, that doesn't sink into sloppy support work or justify long-term agents who have become soft and stacked arms. That's a management decision. Obviously, smaller. Obviously, more elite. Obviously, more capable. But keep it funded.

CHAIRMAN BROWN: Thank you, again, Ambassador Lilley. Your presentation and the answers to questions have been extremely illuminating. We appreciate your taking the time to come here.

AMBASSADOR LILLY: Thank you, sir.